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Johnson & Johnson's business has done well in recent quarters and the company seems to be playing its cards right. Traditionally known for its market leadership in medical devices and diagnostics, J&J has begun the process of transformation into a more lean and pharmaceuticals focused company. Growth in the consumer and medical devices business is flattening out whereas certain therapeutic areas such as oncology and immunology offer attractive growth opportunities for the company’s drugs. Given J&J’s strategic approach and its strong dividend history, it continues to remain an attractive investment, which is perhaps the reason why its market price has gradually crawled up since the beginning of 2013.

J&J’s pharmaceutical business is growing strongly due to the continued uptake in its current products and new launches. While growth in the company’s consumer and medical devices & diagnostics segments has flattened out, the surge in the sale of its drugs catering to immunology, oncology and infectious diseases has kept the wheel spinning. Johnson & Johnson has performed better than many of its peers in recent years in the pharmaceutical business. Revenues from this segment jumped by almost 11% in 2013, and we expect growth of just under 10% this year as well. While the pricing pressure is likely to continue, there are some specific drugs that are fueling the company’s growth.

In Q1 2014, J&J's immunology drug sales increased 6.3% globally. This was significantly below the figure for Q1 2013 and can be attributed to almost flat sales for Remicade, which is J&J’s biggest drug. In this context, Simponi and Stelara become even more important. Worldwide sales for these drugs jumped 9.3% and 31.8%, respectively, amounting to roughly $715 million. This represented 30% of the company’s immunology revenues, and we expect this percentage to increase going forward. The overall immunology drug market is growing and the international markets present large potential.

Additionally, Johnson & Johnson’s recently launched Hepatitis C drug, Olysio, has done better than expected. It echoes the success of Gilead Sciences’ drug Sovaldi. Olysio’s sales for Q1 2014 stood at $354 million, making it the second biggest anti-infective drug for the company within a short period of time. Gilead Sciences is currently the market leader in Hepatits C treatment and is on its way to make a fortune selling its breakthrough drug Sovaldi. The drug’s sales for 2014 may amount to anywhere between $7 billion to $12 billion, according to ISI Group. This suggests strong growth potential for Johnson & Johnson’s new drug, which has also been recommended by the Liver Society for concurrent dosage with Sovaldi.

Oncology, or cancer therapeutics, is also doing well for J&J. Zytiga has surpassed Velcade to become Johnson & Johnson’s biggest oncology drug. While Velcade’s sales grew by 15.8% in Q1 2014 amounting to $408 million, Zytiga’s revenue surged by 48.8% to $512 million. Together, these two drugs constitute roughly 85% of the company’s oncology revenues and continue to gain market share. In the U.S., Zytiga has increased its share in the metastatic castration resistant prostate cancer market to 34%, besides benefiting from the overall market growth.

Downsizing Diagnostics And Consumer Businesses

J&J has traditionally been known for its medical devices and diagnostics equipment, but that is slowly changing. Given the slowdown in the segment’s growth, the company is looking at ways to downsize its medical devices business so as to operate more efficiently and free up money to fund its fast growing pharmaceutical business. We believe this is the right move as despite being the global leader in medical devices and diagnostics market, J&J hasn’t been able to grow much. Stiff pricing pressure and competition from lesser known names seems to be taking a toll on its operations. Earlier this year, it announced the sale of its diagnostics unit, Ortho-Clinical Diagnostics, to Carlyle group for around $4 billion. Ortho-Clinical Diagnostics manufactures and markets donor screening and blood typing products, besides being involved in information management, testing technologies, and automation and interpretation tools. The unit's revenues have declined in the last two years, and have also come down as a percentage of total medical devices revenues. This can be attributed to certain inventory issues and pricing pressure due to growing competition. It won’t be surprising if we see more such divestitures in future.

In March 2014, J&J entered a definitive agreement with Reckitt Benckiser to sell global rights to its K-Y brand. The move was hardly surprising from From Johnson & Johnson?s perspective, as its consumer business holds little value for its stock due to low margins. The essence is that there is a good chance that the company will continue to downsize its consumer and medical devices businesses and focus more on the growing pharmaceutical segment. That’s a rational strategy right there!